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The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$2.31b, ServisFirst Bancshares Inc’s (NASDAQ:SFBS) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off ServisFirst Bancshares’s bottom line. Today we will analyse ServisFirst Bancshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
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How Good Is ServisFirst Bancshares At Forecasting Its Risks?
ServisFirst Bancshares’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its large bad loan to bad debt ratio of 455.5%, ServisFirst Bancshares excessively over-provisioned by 355.5% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
ServisFirst Bancshares is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts ServisFirst Bancshares’s bottom line. The bank’s bad debt only makes up a very small 0.23% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
ServisFirst Bancshares makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. ServisFirst Bancshares’s total deposit level of 94.65% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.